Latin America Advisor

Financial Services Advisor

Is Bank De-Risking Choking Caribbean Growth Prospects?

Timothy Harris, the prime minister of St. Kitts and Nevis, addressed the United Nations General Assembly in September. // Photo: United Nations.

During the U.N. General Assembly meeting in October, three Caribbean leaders, including two prime ministers, said bank “de-risking” and the loss of correspondent banking relationships have severely harmed their economies. Among them, Timothy Harris of St. Kitts and Nevis said the trend is hindering the island nation’s development trajectory. How big a problem is bank de-risking for Caribbean economies and their banking sectors? Has compliance with international financial regulations, many of which originate in the United States and Europe, become too onerous for Caribbean banks to cope with? What would it take to reverse the de-risking trend?

Georges Hatcherian, assistant vice president and analyst in the financial institutions group at Moody’s de México: “The loss of global correspondent banking relationships (CBRs) has increased external refinancing and repayment risks for banks in emerging markets, including in the Caribbean and Central America. This de-risking has been driven by a reassessment of risk appetite by global banks in a context of increased regulatory compliance costs and the threat of heavy fines by U.S. and E.U. regulators. The decision to cut these relationships was also due to the limited economic benefits they offered to the global banks, as many local financial institutions that rely on these relationships are small. Given the currently unfavorable balance of risk and reward, correspondent banking can be made more attractive to global lenders by strengthening and enforcing local anti-money laundering legal frameworks, as has happened in Panama for example. CBRs are critical for processing international transfers, including workers’ remittances, which are a key source of support for many Caribbean economies. Remittances also help underpin local banks’ asset quality as they provide resources to low- and middle-income borrowers to pay off debt. Some local banks may also rely on CBRs to repay certain international financial obligations, such as coupons on global bonds. Consequently, a loss…”

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